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TMI Blog1971 (6) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... dan Shumshere Jung Bahadur Rana of Nepal, since deceased, made the largest investment and purchased the majority of shares. The Rana during his lifetime had been a director of the company and the chairman of the board of directors. Rani Jagadamba Kumari Devi is the widow of the late Rana and upon the death of the Rana she inherited the shares and succeeded to the office of the chairman of the board of directors of the company. The articles of association of the company at the material times, inter alia, provided: Article 109. "Sri Animesh Chandra Roy Chowdhury, Sri Jagadish Chandra Chowdhury and Sri Sukhomoy Das Gupta or their nominees or successors in the board, as the case may be, each, shall successively by rotation, become managing director of the company, each to hold office for a maximum of two years at a stretch. Article 110. "The remuneration of the directors shall be as follows: The board of directors shall from time to time fix the remuneration of the directors, but in no case shall be less than Rs. 4,000 per month as office allowance and an amount equivalent to 10% of the net profit of the company earned in the previous year. This amount shall be distributed as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total (Rupees) (Rupees) (Rupees) 1956-57. Rani Jagadamba Kumari Devi 19,200 3,998 23,148 Sri A. C. Roy Chowdhury 8,800 1,832 10,632 Sri S. Das Gupta 8,800 1,832 10,632 Sri J. C. Chowdhury 7,600 1,832 9,432 Sri H. A. Dikshit 2,400 500 2,900 ------------- ------------- ----------------- 46,800 9,994 56,794 ------------- ------------- ----------------- 1957-58. Rani Jagadamba Kumari Devi 19,200 4,589 23,789 Sri A. C. Roy Chowdhury 8,800 2,103 10,903 Sri S. Das Gupta 8,800 2,103 10,903 Sri J. C. Chowdhury 7,600 2,103 8,703 Sri K. A. Dikshit 2,400 575 2,975 ------------- -------------- --------------- 46,800 11,473 58,273 ------------ -------------- --------------- 1958-59. Rani Jagadamba Kumari Devi 19,200 1,845 21,045 Sri A. C. Roy Chowdhury 8,800 846 9,646 Sri S. Das Gupta 8,800 846 9,646 Sri J. C. Chowdhury 7,600 846 8,446 Sri K. A. Dikshit 2,400 230 2,630 ------------- ------------- --------------- 46,800 4,613 51,413 -------------- ------------- --------------- 1959-60. Rani Japdamba Kurnari Devi 19,200 4,119 23,319 Sri A. C. Roy Chowdhury 8,800 1,888 10,688 Sri S. Das Gupta 8,800 1,888 10,668 Sri J. C. Chowdhury 7,600 1,888 9,488 Sri K. A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons given in his order, held that the remuneration drawn by the directors was far in excess of the amount justified by the rendering of services. He, accordingly, took recourse to section 10(4A) of the Income-tax Act, 1922, and disallowed the abovementioned amounts out of the total remuneration and commission paid during each year. The reasons which weighed with the Income-tax Officer appear to be that so far as Rani Jagadamba Kumari Devi was concerned, she was interested in the company merely as a custodian of the investments made in the said company by her deceased husband and services alleged to have been rendered by her did not justify the payment of the remuneration; and so far as J. C. Chowdhury and S. Das Gupta were concerned, they were not devoting their full time and attention to the affairs of the assessee-company, being directors of two other companies also, and so far as A. C. Roy Chowdhury was concerned, he was not at all looking after the affairs of the company and so far as K. A. Dikshit was concerned he was serving the Rani and not the assessee-company. With regard to the commission paid, the Income-tax Officer said that it was only an allocation of profits. As aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts referred the following question under section 66(1) of the Income-tax Act: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance of the amounts of Rs. 46,162, Rs. 45,753, Rs. 42,967 and Rs. 46,720 for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60, respectively, out of the remuneration and commission paid to the 4 directors of the company and to Sri K. A. Dikshit by recourse to section 10(4A) of the Indian Income-tax Act, 1922, was justified and in deleting the said additions?" Mr. B. L. Pal, learned counsel, appearing on behalf of the department, has submitted that the order of the Income-tax Officer disallowing the bulk of remuneration paid to the directors by applying the provisions of section 10(4A) is proper and perfectly justified. He contends that section 10(4A) is a special provision which controls the operation and effect of all the clauses in section 10(2) including section 10(2)(xv) and, therefore, even if the conditions of section 10(2)(xv) are fulfilled, an expenditure may still not be allowed, if it comes within the mischief of section 10(4A). It is the argument of Mr. Pal that section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roach to the problem by the taxing authorities was wrong and the Tribunal has rightly pointed out the same in its order. Mr. Sen has contended that the provision contained in section 10(4A) is more or less by way of clarification of the provision contained in section 10(2)(xv) and is in the nature of a statutory instruction. Mr. Sen contends that the legitimate business needs of the company and the benefit derived or accruing to the company from any allowance made, have to be considered from the view-point of the businessmen and the Income-tax Officer cannot substitute his own views on these matters ignoring the view-point of the businessmen. It is the contention of Mr. Sen that, in applying the provisions of section 10(4A), the Income-tax Officer must not act capriciously or arbitrarily. He must act judiciously and form his opinion by considering the relevant factors, namely, (i) legitimate business needs of the company, and (ii) the benefit derived by or accruing to the company and these factors he must consider from the standpoint of the businessmen. Mr. Sen argues that the legitimacy of the business needs of a company may differ from company to company and the question will hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company and if is the submission of Mr. Sen that under such circumstances the total amount spent for the head office including the remuneration of the directors did not exceed Rs. 5,500 per month and the said amount can never be considered to be unreasonable or excessive. Mr. Sen has argued that the value of services rendered or of the benefits which accrue to a company cannot be properly judged by reference to the number of hours of work put in by any of them and the said question will necessarily depend on various other factors. He contends, that Rani J. K. Devi as chairman of the board of directors was advising on all important matters and her advice was considered to be of the greatest possible importance from the view-point of the benefit of the company and also of the business need of the company. Section 10(4A) casts a duty and confers the power on the Income-tax Officer not to allow any deduction in respect of any remuneration or benefit or amenity to any director or any person who has a substantial interest in the company, as contemplated in the said section, if the Income-tax Officer is of the opinion that any such allowance is excessive or unreasonable, having rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of the power and the said sections enjoin the Income-tax Officer to take into consideration in exercising the power, (1) the legitimate business needs of the company, and (2) the benefit derived by or accruing to the company in forming any opinion as to the reasonableness or otherwise of the amount spent. The legitimate business needs of the com pany must be judged from the view-point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Income-tax Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny substantial interest in the company if in the opinion of the officer such allowance would be excessive or unreasonable. The officer cannot of course be arbitrary or capricious. He cannot make a guess-work relying on his instinct. He must form an opinion having regard to the 'legitimate business needs of the company and the benefit derived by or accruing to it therefrom'. He must say that the business of the company is such that it does not need a highly remunerated director. Or he may after an analysis of the work done by the director reach the conclusion that the company does not derive benefits corresponding to the remuneration paid. It is ovious that the Income-tax Officer must apply his mind to the nature of the business of the company, the actual work done by the directors, the quantum of income earned by the company, the necessity to pay remuneration to the director and to other allied considerations, to form an opinion whether or not the payment is reasonable or excessive. The mere ipsi dixit of the officer unrelated to the criteria laid down in the statute would not be a considered opinion but dogmatic assertion. We have no doubt that the statute does not permit the depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire matter essentially from the angle of a tax collector and he has not applied his mind to the basic questions dispassionately and objectively from the view-point of a prudent businessman. He has not given any proper consideration to the legitimate business needs of the company and, on the aspect of benefit, his view has been mainly influenced by applying his mind only to the kind of physical or hard labour done by the directors. Even on this aspect, the assessment of the Income-tax Officer is clearly wrong. Judging from the angle of the tax collector, the Income-tax Officer considers the sums paid to the directors to be unreasonable on the basis of percentage in relation to the profits of the company, ignoring the other relevant considerations. The Income-tax Officer does not appreciate that for a company of this kind, which has two producing centres and other distributing centres with a huge annual turnover ranging from over Rs. 23,66,000 to over Rs. 30,86,000 during the relevant years in question, total head office expenses of about Rs. 5,000 per month inclusive of all payments to directors both on account of remuneration and commission, cannot by any proper standard be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees and their number and cadre and remuneration will depend on the nature of the company, its needs and capacity. There will be ordinary workers and there will be officers and amongst them there may again be gradation. The fact that there are employees and officers who may do most of the hard labour, cannot justify an argument that the remuneration paid to directors should not be allowed. Directors who are at the helm of the affairs of the company remain mainly responsible for managing the affairs of the company and the company may get larger benefit from their advice, guidance, supervision and effective and efficient manner of discharge of their responsibility of properly managing the affairs of the company. Among the directors again there may be a division of labour for the efficient administration of the affairs of the company and there may also be managing directors with larger powers and greater responsibility in the matter of management of the affairs of the company. The benefit of their services derived by or accruing to the company cannot be judged by considering the number of hours of work put in or the kind of physical or hard labour done by them. The benefit has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titute a valid agreement between the members themselves who also happen to be the directors and between them and the company, results in the smooth and efficient working of the company and avoids all kinds of possible hitches amongst them. As the payment of the total amount of remuneration inclusive of commission to the directors is justified in the facts of the instant case, the payment to the Rani of a larger sum in the matter of distribution of the total amount by agreement between the parties cannot be considered to be unjustified, particularly as such payment results in smooth working of the company on the basis of the articles. We, however, wish to make it clear that we are not allowing the amounts paid to the directors including the Rani, merely because such payments are made on the basis of the provisions contained in the articles. We have earlier observed, and the Supreme Court makes it clear in the case of Nund and Samont Co. Private Ltd. v. Commissioner of Income-tax, that payment of any remuneration to a director only on the basis of the provisions contained in the articles does not constitute sufficient justification and does not bar the jurisdiction of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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